i mean, as on as we have that conflict of interest, are we ever going to get to a place where we're actually as, you know, your mission states, are we able to protect users of credit ratings? >> in my estimation, compliance is not a destination but a journey. and we're rel along on that journey with regard to rating agencies and infusing in them importance of compliance, enhanced governance, transparency, training, and other methods to build rigor within the rating process and to establish integrity. to address specifically your question with regard to the issuer or paid conflict. in august 2014, the commission adopted a new set of rules and the rules were effective fully indown of 2015, importantly in that set of rules there's a requirement for a complete separation of the sales and marketing function from the

analytical function and that's accomplished by prohibiting rating analysts or developers of methodology from participating in sales or marketing -- sales and marketing activities, or from being influenced by other business considerations. apart from -- >> let me stop you there, because i've only got 30 seconds left. your report, your report, says that they're departing from their own policies and they're not following their own programs and those companies are not being held accountable, under your system, the one you've got root now. and that's after this last iteration of changes has come forward. i just -- they're still paying for ratings, still paying for ratings. they know the rating agencies know where their deal flow comes from and they're acting accordingly. i don't see the -- i don't see any changes here compared to what we were doing before. >> i thank the gentle man for his questions. and i ask not to end with a

question since we're trying to get in before the votes called. who's up? mr. hill, recognized for five minutes. >> thanks, mr. chairman. thank you for the pan. thanks for your service at the commission. dr. flannery, i took question you answered a few minutes ago about the d.o.l. rule and your work and the chair's commitment to fiduciary rule at the commission. the s.e.c.'s got 80 years of experience in overseeing broker dealers and investment dealers and doing economic analysis and you made the statement it's really, really hard to get it right. obviously this has been something that the commission was asked to study back in 2010, as a part of dodd/frank. yet the department of labor has rushed into this rule, not rushed, that's not fair to the d.o.l. because they've worked on it two, three years.

the commission didn't take the lead to get it right on behalf of all market participants. since it is hard, what do you think are the hardest things about it when you look at the -- at it from an economic analytic point of view trying to, quote, get it right. obviously finra and the s.e.c. have led the way in designing suit ability standards and best interest standards. if we manage money on a discretionary basis, it's subject to fiduciary standard in the industry what happen do you rank? >> in the context of the s.e.c., and context of combining the standards to which the fiduciary standards to which broker dealers and investment advises are have been held historically, they are different standards.

in the old days broker deals sold things to people and compensated via commission. investment advisers gave advice, didn't get compensated via commissions but compensated via fees. now the broker dealers have moved into the advice giving space and they bring with them, however, a compensation arrangement that was designed and that survived in a somewhat different environment. so one of the first questions that comes up here is, what did does it mean to give financial advice? if i'm a broker, i've got to make sure that the security is suitable for my customer, but of the at customers bought the security, i'm then -- i don't have any further responsibility to monitor customers' portfolio. >> that's not true, is it? they've got an obligation to make sure the financial disclosure and their situation is reviewed, at least, annually, in most firm's policy, manuals for net worth, earnings, suit

ability, changing circumstances, marriage, having children, having an estate plan. they do have continuing obligation this their client, don't they, under all policies of finra and the s.e.c. >> i believe the broker dealer has an obligation that transactions oriented as opposed to life change. if there's a life change and the customer comes back, there could be different definition of suit ability. if there's a life change and the customer doesn't come back there nos responsibility for the broker to call up and say now that you're remarried you should do something different. >> i would disagree with that, based on looking at firms' policies and procedures, manuals for a couple of decades. what else do you think is challenging getting it right from the commission's point of view? >> one of the things that surprising to me is how difficult it is to disclose information effectively.

and broker dealer and the investment adviser rules and standards are based on disclosure. there's sometimes a difference between disclosure and transmission of information. even starting a behavioral finance unit to try to understand how people process information that is maybe second nature to those in the finance industry but new and confusing to those outside. >> couldn't the department of labor's approach of creating one set of approaches for a retirement account versus another set of approaches executed by the s.e.c. and finra on behalf of all other account categories lead to investor confusion? >> i suppose it could, certainly there's some inevitable confusion, i suppose, because the department of labor rules are promulgate under a different set of statutes, different set of considerations, than the

securities laws under which we operate. >> hence, i think that in an ideal circumstance, omb, the administration, would have insisted, that the commission take the leadership role and harmonizing this approach. thank you mr. chairman. i yield back. >> the gentleman yields back. the gentleman from connecticut is recognized for five minutes. >> thank you for being with us and for your good work. two questions which i recognize are tangential to our offices and divisions but both pertain to topics to which i've been concerned about, what i perceive as silence on part of the s.e.c. the first pertains to insider separating. as you well know, the second circuit under the newman decision, apart from overturning two high profile insider trading convicts but a great deal of uncertainty into future prosecutions of insider trading. i think we could all agree on two things. one we don't have a good definition of insider trading

and i, for one, am a believer if we send people to jail we should have good statutory definitions why we're sending them to jail. secondly, without getting into the guts of newman, as you know, the decision was around whether it could be held liable unless the tippee flows of the personal f benefit received by the tipper for disclosure. if i'm april corporate insider and tell you i shouldn't be telling you this, it's probably illegal, you could make a lot of money, you trade on it, as lon as you don't know i've received a tangible, personal benefit you are not prosecutable, liable under the newman decision. i'm look for more clarity from the s.e.c. about whether there should, in fact, be a statutory definition of insider trading. i point out mr. colleague, mr. lynch, i have put forward legislation to senator, menendez

and reed have put forward legislation. the uncertainty introduced by newman is a problem we should address. >> i believe, as only member of the enforcement division, i'm the best qualified to talk about this. but that all said, i think the newman decision raises issues that are extraordinarily nuanced and i think i want to be as helpful as i can but i in to get a real appreciation for the considerations that go into how newman effects our enforcement decision and ability to bring insider trading cases is best addressed by someone who has more background than that. i'd be happy to take questions back and get the right person back to you. i think you probably would be better served by hearing from people who more appreciate the nuances how it impacts our enforcement efforts. >> i recognize this isn't the

panel that's right on point for that. i'm sensing a certain amount -- i understand this, we've got a vast body of state law with insider trading, ambiguity of no statutory definition of insider tradi trading. i would appreciate if the commission would focus on nuance, getting always i clear message and get away from what is case law tradition and maybe bureaucratic inertia. on the tipper to tippee liability, in some level it's nuance but some level it's commonsensical. second question, we've been doing a lot of work on the jobs act, which i supported and now looking at additional changes, expansions to the job act. the whole idea is that young companies shouldn't bear the burden of sar bayne oxley compliance. i've had $1 million to $2 million a year, we're spending a

ton of time on that issue, i think it's good but i can't get enough attention drawn to the odd fact that one of the biggest sources of cost for a young company going public is a remarkably consistent gross spread of 7%. let's say that the average ipo is in the neighborhood of $200 million, 7%, that means $14 million in the ipo out the door. spending a ton of time on $1 million or $2 million a year associated with sarbanes-oxley compliance but i'm having trouble why we're not focuseden 0 the odd fact that 95% of all ipos that have occurred in the ten-year period after 98 to 2007 in the united states, 95% had a 7% gross spread exactly. in europe, there's no such clustering. in europe ipos gross spread average 4%. you almost never see a gross spread as high as 1%. does that clustering at 7% over a period of time strike you as

odd and perhaps worthy of investigation? >> let me try that. another industry, which is not so germane to the issues you express, but another industry that has the same phenomenon is real estate brokers. i believe their numbers are 6%. that's always puzzled me. there are economic analyses for both cases why this might be a good contract. you can find arguments equivalent to what's implicit in your comment, maybe something nefarious going on. you can find economic arguments on both sides. >> thank you. >> i yield back. >> thank you all so much for being here. appreciate your work and testimony today. mr. wyatt, marry mar cop list recently revealed that he is

working to uncover three multibillion schemes, one bigger that madoff's. many of the failures that allowed bernie madoff to continue his ponzi scheme can be traced to failures of o.c. examinations to connect the apparent dots, unaware of parallel investigations into madoff's entities. do you believe the institutional changes implemented by o.c. since 2009 are sufficient to stop future fraud and if not, what else needs to be done. >> i do everybody bloo the changes, as we made after madoff have significantly enhanced our ability to detect those types of activities. the streamlining of our tcr program to ensure there are no silos in the regions as well as connectivity that we amongst the regions to ensure that we see a theme or risk throughout we can act on it accordingly and bring resources to bear. we're continuing to run risk-based program. continuing to look for

connecting the dots, as you say, with the tcr program and including information gathering from other divisions. >> white, the s.e.c. did not and still does not have a standardized identification code that consistently identifies all the entities that regulates and makes connections between them. i believe the madoff failure was in part a data standards failure. last year congressman, myself and number called the financial transparency act to direct all financial regulators, including the s.e.c., to adopt data standards for information they collect with the hope of transforming the disconnect into open searchable data. in fact, the original name of the bill was the madoff transparency ability, the s.e.c. will adopt the legal entity to consistently identify all the entities it regulates and affiliations between them. so in the future parallel investigations into related entities like will be electronically visible. for all information provided by other laws directs each agency

to publish such information, sho as open data, machine readable and freely downloadable. won't initiative like this help prevent future failures like we saw with the bernie madoff scheme. >> we have adopted strategies to enhance our use of data analytics and capture all the data that's to us from external sources. we've centralized all the you information we have regarding examinations. so anyone throughout can go in and look at a given registrant and see what activities have been involved in oop examination or nonexamine review for that registrant. we're certainly applies the data analytics and will welcome anything that can give us additional insight into the activities of the registrant's that we're examining. >> thanks. i believe we have to do better. we can do better and there's incredible technologies and connectivity, we ought to be able to recognize this.

let me switch to mr. flannery, if i could. the department of labors proposed few dish area role mentions annuities 172 times, but the regulatory impact analysis does not examine the impact of the rule on annuities advisers, insurers or the retirement that's using them. last october, david graham from the division of investment management testify, and i quote, he said a lot of we've been talking about with them, the department of labor, have been on impacts, impacts of choices that they've been making on investor tos. what impacts is mr. grim describing? did your office conduct any cost benefit analysis? >> we did not do a cost benefit analysis. we're involved with providing technical comments. i'm sorry, i'm not familiar with what -- >> i think gentleman's time has pyres. we're getting ready to vote. the chair now recognizes mr. foster for a period of five minutes. >> thank you, mr. chairman. and questions i guess will be

directed to mr. flannery. i would like to congratulate you on your hiring of two physic ph.d.s as the only physicist in congress. the only ph.d. scientist of any kind. i recognize the complexities of things like structured financial products. the technology that's involved and high frequency trading. all these of sort of things that we need that sort of expertise and i'm glad to see that you recognizing that too. >> thank you. >> i'm also the author of the contingent capitol requirements in the dodd/frank bill. and as someone who is widely credible with having invented the concept in 2002. we've seen it adopted really worldwide, i think, with what i see as a lot of success, you see the swiss banking regulators, which are faced with a problem that their economy is not big enough to backstop the size banks that they have. they have used contention capital to make it solid counterparties.

and contemplate times in financial stress. we've seen the whole deutsche bank is aggressively restructuring, you know, cutting bonuses and so on. because driven in large part by the worries that the contingent convertible coupons will not be paid more than a year away. it is, to my mind, working very successfully at providing the early morning signal that is one of their main merits. i guess most recently canada, the new government canada announcing they are going to use contingent capital instruments to make sure that the canadian taxpayer is not on the hook if big banks get in trouble. i think, you know, this is a very successful thing, i've continued to try to get them adopted, which they have full regulatory authority but we're not seeing very aggressive adoption. i was wondering if you can just give your take on what you see as the lessons learned in the

worldwide thing, and the way forward for potentially getting those lessons used in the united states. >> well, first of all, it's a pleasure to meet you. contingent capital is personally in my academic environment and career i spent a fair amount of time talking about. i think you put your finger on what i view to be the biggest advantage of contingent capital instruments. that is rather than wait until the last minute when it's close to insolvency, contingent capital instruments address that possibility, keep us away from that possibility and give the managers and the shareholders of the firm an incentive to stay away from certain trigger points. when i first started talking about this, the crisis was fresh in our minds and people who had this vision that capital would be almost zero then there would be a conversion. by the time capitalism was zero, all sorts of bad things started to happen to these firms. i believe -- i'm sure you're

correct when you say that they could be permitted as part of the capital stack of the united states. they haven't been, and i think there were people who feel that higher capital formal equity requirements are safer, more protective than contingent capital requirements are. and then how one comes out on that is based on how one -- what one believes is the effect of higher capital requirements on the operation of the firm and the pricing of its products. >> do you think at this point there are good examples of trigger mechanisms that have been workable in times of stress or is that still an on going experiment. >> i believe that's a problem. the securities in europe and asia that have been so successful have book value trigger mechanisms. and one of the characteristics of firms that get into trouble is that their market value deteriorates much more quickly than the book value does.

the market loses confidence in the firm, despite the fact that it may be showing strong book capital relations. and so the trigger of these capital instruments off of book capital ratios i view as sort of problematic and likely to interfere with their value. and are there issues just related to the sec, you know, how they would be registered under the 1933 act or are those, you know, if you go and go to the european web sites with the thought of investing in contingent capitals there's this big warning if you're a u.s. citizen, forget it. i was just wondering if there is a clear regulatory path of whether you would see sec issues involved in making these widely used? >> i'm not aware of any considerations actively going on inside the sec.

it would focus on disclosure discloses that would accept the risks. >> the gentleman's time has expired. >> thank you, mr. chairman. welcome panel, great to have you here, i'm a warm up act for ms. wagner who is going to go in a second on the d.o.l. fiduciary. many of us, as you're well aware, have concerns about the rule. and it's my understanding that the sec, also, shared some concerns about the proposed rule and now the actual rule. is it fair to say that the department of labor, for the most part, disregarded much of the advice that the sec gave to them in regard to this rule? >> the advice that was given, i think of it more as technical comments. some of it was incorporated into the final rule and some was not, i don't know about the preponderance. >> okay. one of our concerns, would be,

one of the economist suggested that the department of labor should measure improper activity of advisors through measuring conflict of interest, proposed with the purpose of the rule making process, no projected investment returns. it seems like the dol didn't take that advice, is that fair to say? >> i'm not familiar with the final dol rule. it's 395 pages, and i look forward to reading it, but i haven't yet. >> have you undertaken any analysis of investors. >> we have not yet gotten to that point because our internal deliberations, again, in a different security space, have not gotten to the point of generating a rule. we have not yet done that sort of economic analysis. >> tell me if you share my concern, i come from central western and northern wisconsin, not a really wealthy part of the world, we don't have a lot of people who have a half a million

or $750,000 in the retirement accounts. we have people who have 30 and 50 and $80,000 in their retirement accounts. there is some concern that we're going to migrate those folks from getting advice from someone that they've worked with and that they know and that they trust to a different computer model. do you foresee that happening, as well? >> well, i think you can look at the robo advisor, and the way you have, you can also look at it as an opportunity for people who are just getting into retirement savings, people are generally more comfortable taking advice from computers than i might be or you might be. >> so, let's actually play that a little bit, it might not be just a person who just started to invest. now, the first time investor in washington, d.c. might start after a couple of years and have $80,000 in their retirement account. in my community, it's after 25 years they have $80,000 in their

account. based on, and maybe this is for the panel, do you think that maybe someone who is not an expert in investing, their life focus has been elsewhere, they have been responsible, they put a little bit of money away. do you think that, say look back to last august, that that person, when the market starts to move is going to be more compelled to look at their computer screen and make their right choice as opposed to calling their investment advisor and trying to sell their investments? their advisor is going to hold on a second, that's not the right call, we should ride this storm. that's not part of our plan. we know there's peaks and valleys we ride it out, don't sell. are they going to get the same advice from the computer? i guess my question is, aren't they going to make really bad choices for their future if you have a robo advisor as opposed to financial advisor? >> i suspect that there were a lot of people in the world in

wisconsin who didn't even know what was happening that day, didn't look at the financial statements. but, in general, i agree with you entirely, good financial advice is valuable. i think that good financial advice also comes with conflicts. >> i don't dispute that. does good financial advice come from a computer? >> i don't know enough about those computers. >> if i'm able to get 8 or 10 questions about, you know, some of my goals and some my income, how many kids i have, what do i want in retirement, i put it in and hits algorithm and spits out advice, do you think that just because i'm a low-income individual, i'm a low-dollar saver, that i shouldn't be entitled to the advice that comes from someone that makes $800,000 a year? >> i guess we don't know. we certain -- certainly the point you make is widely discussed. but we don't know for a fact what's going to happen.

>> do you have a study in the works so we can know? >> we will know when we take up a rule with the sec. >> isn't it too late? isn't it too late because my people are already going to be kicked out of personal advice and they're going to be regulated to a computer, do you share that concern? they're already out once you do your study. and the rule is implemented. >> again, the rules under which the dol operate are different from those than the legislative authorities are different from those. >> i can't how we navigate both the s.e.c. and the d.o.l. rule. and how that's going to play out on the expense side. >> sorry mr. chairman, yield back. >> gentleman from california. >> thank you. i would point out that i think think it was congress's intention that the sec and the department of labor have very similar identical rules. it is absurd to think that i.r.a. accounts would have one

set of protections and noni.r.a. and non -- nonpension accounts would have another and it's even i.r.a. accounts of typically controlled by those in their '50s and '60s should have more protection than widows and widowers and elderly people who are typically middle class families control the larger accounts. i share some of the last gentleman's concerns. mr. chairman, the one part of the sec we don't have before us are those concerned with accounting standards. i would like to enter into the record my letter of earlier this month demonstrating the incredible harm that is being done to our economy by the misuse -- well, the departure for accepted accounting theory that requires companies to write off the research and the experimentation costs. thank you.

mr. butler, we've just -- we're still suffering from this 2008 downturn. i think it was mostly caused by the credit rating agencies. we still have a system where the umpire pays -- is paid by one of the teams and selected by that team. and the sec has decided to, instead of being an agency that favors transparency for investors has decided to conceal this by such relatively meaningless so-called protections. it says, well, the sales force can't talk to those who do the ratings. the people who do the ratings are compensated by the company, their promotions depend upon the company. they want the company to be successful. is there any rule that those engaged in rating debt obligations cannot receive stock

options, bonuses, or any benefit from the success of a company they work for, mr. butler? >> each of the companies has different compensations range -- >> i asked, is there any sec prohibition? >> with regard to specifically rating analyst and compensation. >> yeah. >> i would have to take that back. >> okay. so if you give -- if you give grade inflation, the company makes money, your stock options do better and the sec has no rule of which you're aware. if you're not aware of the rule, it will be hard to think the rule is being enforced since you're the one enforcing the rule. let me -- i mean, the debt markets are, obviously, far more important to the economy or at least involve far more capital than the stock markets, those who invest basically entirely dependent upon the ratings, even if you know better, you're

managing, say, the t rowe price bond fund, if you decide to forego buying a double a rated bond that pays 20 basis points more, then i'm going to invest in van guard, because all i'm going to be able to do is decide which has the highest -- the highest rating and the highest yield. i want to talk to you about one particular problem, that is the peruvian agrarian reform bonds. obviously, the way to make money is to try to get peru as a client. it's a significant country and one way to do that is to avoid even offering to rate these agrarian bonds that seem to be a part of a selective default. is there any rule that says that a bond -- that a credit rating agency can't refuse to rate bonds because they can make more

money from the -- you know, they're paid off one way or another not to rate them? >> i'm generally familiar with the media coverage on the peruvian bonds. and i can't discuss the specifics. >> is there any rule that says that you enforce, that would prohibit peru from saying, please don't comment on our agrarian bonds and we'll make sure to give you a contract worth millions of dollars in some other part of our financial dealings? is there any rule that you can point. >> the rules provide specifically and that's the prohibition of rating analysts to be involved in sales. >> this is whether you take the engagement. >> doesn't involve the rating analysts. involves the sales force. >> the rule prohibits rating of the analyzed data function from being involved in the sales marketing function, that that's achieved by prohibiting analysts

from being involved in sales and markets. >> that's not what i'm asking. the sales force decides whether to take the engagement. if peru pays them a few million dollars to say just don't even get your credit rating analysts involved, don't let them look at it. >> he's got the question, do you have the answer? >> in addition to the rule, there's a required certificate to accompany each rating action that says there was no influence -- >> this is a nonrating action, sir, you're avoiding my question, the answer is obvious. >> thank you. >> i yield back. gentlemen, recognized for five minutes. >> director flannery, as par of last year's transportation bill of my bills was included that would allow small reporting companies to incorporate by reference any post effective amendments on the form s-1. the sec when implementing this provision in january, estimated that over 70,000 work hours and $85 million would be saved annually by small businesses. truly, this is a huge benefit

for small companies. how -- however, in february, i wrote a letter to the sec asking for a similar analysis on the effects of expanding the availability of form s-3 for smaller reporting companies regardless of public float or exchange trade and status. this is a provision of a piece of legislation that i sponsored and which has been passed out of this committee, unfortunately the response that i received to my letter was wholly inadequate and didn't indicate whether such a review or study would be done. dr. flannery, would you commit today to performing that kind of analysis of the benefits of this provision for small companies and providing more detailed response? >> well, i'm sorry but i never saw your letter. i don't know -- i don't know who went into -- what went into the response. one of the things that concerns me about reducing reporting from small companies is certainly there was room for there to be waste.

but there's also evidence that companies that go to the markets with less information are less likely to be traded and a secondary market trading for stock is ultimately what companies would like to have the they're going to have access to capital. to get back to your media point, i have a number of current policy things that we need to deal with, i will be more than happy to consider doing. >> i would like to take a look at this, facilitating capital formation is obviously part of the sec mission and this is a provision that has appeared in that sec forum on small business capital formation annual report several times. i think we can really find common ground here and i would ask, dr. flannery, that you all commit to performing this kind of analysis. i will make sure that you get a copy of my original letter, i'll make sure i send it directly to you. moving on, i would like to obviously discuss the extent that the sec and department of labor coordinated in crafting their recently finalized fiduciary rule.

according to e-mail records outlined in a recent senate report -- and mr. chairman i would like to have these entered into the record -- it seems that the department of labor disregarded advice from the sec, specifically, regarding concerns raised by the division of economic and risk analysis. in fact, a specific quote, and these are fascinating reads, specific quote from an economist at the department of labor states, we have now gone far beyond the point where your input is helpful to me. these exchanges between the sec and the dol should make for very interesting reading. from your perspective, over the past year, sir, from the proposed rule to the recently issued final rule, how well has the department of labor coordinated with the sec? >> we certainly had opportunities to provide

technical assistance. i'm familiar with the e-mail you describe because it involved one of my staff. >> yes. >> the staffer from dol had also been a friend and professional acquaintance of this fellow for a while. i think what you're seeing is the culmination of a long string of e-mails. the economist can be pretty direct. you know, if somebody says, i understand what you're saying, but it's not applicable to my case, i don't want to hear any more about it, that's kind of the way i interpret that e-mail. >> there were others here, too, and i don't see the department of labor being open to any of your advice from, i think, a very fine office that you run and certainly, you know, i have great concerns, i want the dera to do an analysis and an impact of this dol rule as it stand right now. is that forthcoming? >> when and if -- and i hope it's when -- the commission considers the rule for fiduciary standards in our space, we will look carefully at the dol rule that will be part of the

baseline. we always start with the baseline. >> it's your jurisdiction, sir, honestly it is, as laid out very perfectly in dodd/frank section 913. we want you to do your own uniform fiduciary rule making here. this is your purview, your space. you are the regulators, and including fen ra. and i really encourage and would like to get a commitment that you're willing to do a cost benefit analysis when doing this. >> yes, absolutely. that's always part of one of our economic analysis. >> i look forward to working with you as we move forward. >> i look forward to working with you. >> the gentlelady yields back. the gentleman from texas. >> thank you, mr. chairman. mr. butler, could you please describe the statutory requirements for. the annual examination is required to cover eight specific review areas and also requires that we conduct an exam of each of the registered with the sec.

the eight required review areas are informed by the risk assessment process that we use internally. the risk assessment process takes a variety of inputs information the prior exams. it takes inputs from the media, from the other offices and divisions of the s.e.c. as well as tips, complaints, referrals that we receive on the s.e.c.'s tcr align. the risk assessment process is used to effectively differentiate risk business registrant which are informing the exam scoping which allows for the exam teams to be most effective as they go through the examination process. we also have the examination teams arrayed in such a way have -- examining the larger restaurants and smaller registration team, smaller examination teams of the smaller registrants we have an effective allocation of resources. as a result of the examinations, there's a report given to each of the registrants, specifically identifying

the deficiencies we've noted. there's a summary report that's required to be put together by the office, which is assembled and reports publicly a summary of all the essential findings that we found in the examinations. >> do you think there's room for improvement on the present requirements? >> i think we're doing a very good job and effective job of what we have. i believe that we can do better and which one of the reasons why from the budget request an additional request for two fy '17 would be used as specialized examiners. i think having specializes examiners it would allow for us to go narrow and deep specifically, issues that arise perhaps during an examination, perhaps at other times during the course of the year. >> do you think it's necessary for those exams to be annual and for your folks to be present? >> i think it's important over site the agencies we've seen real change as a result of the examinations conducted and real change implemented at the firms as a result of the

recommendations that accompany our findings, but for the fact we're in there with irregularity that we are, i would not be able to sit here today and say with such -- such conviction that there was real change. i think that the annual requirement, though, is one that allows for us to bring a different approach each year to focus on different areas within the firm, so that we're not going in on a predictable basis, but rather on a more tailored basis for a particular firm with regards to risk that have been identified to us or that we've seen. >> if you could scale or tailor the current requirements, what would you do? >> i'm sorry, could you repeat the question. >> if you could scale or tailor the current structure, what would you do? >> i'm comfortable with it as it's currently crafted. >> the written statements notes that your office authorized to award whistle-blower is in the range of 10 to 30%, why is the threshold not zero?

>> i think if the intention is to inventy advise individuals to come forward, i think the calculus that an individual goes through to decide whether they're going to report seasoning is very complicated and has a lot of factors. amongst them, i think how much is in it for me and it could be how much is in it for me. but if it is true that when a person making a calculus whether they should approach regulator, one of the out comes could be that they give zero, that could change and effect negatively their incentive and their enthusiasm about coming forward, i think it's appropriate to not have zero as the baseline so that individuals that may be reluctant to come forward knows there's at least possibility of some monetary award. >> what's the current value of the whistle pleauer fund? >> just over $400 million. >> 400 million. >> correct. >> what kind of internal controls do you have in place that, you know, respect to that fund.

that's a pretty sizable amount of money? >> so, we can only make payments when commission approves it and there's a process by which we pay only against what we can confirm has been collected and so we have internal controls to make sure that the cases that have been deemed to be worthy of an award, we -- the documentation requirements that we receive documentation either from the court or from the appropriate person inside the sec to verify we've collected the money, and then we multiply that what the percentage of the commission has approved. >> does the s.e.c. inspector general or the general accounting office audit those funds? >> yes. on an annual basis, audits the investor protection fund. >> thank you. i yield back. >> gentleman's time is expired. we have been called for votes. we have five minutes left on the vote. so those members not here should run over. this is on passage on the bill. i think there are only two votes if i'm not mistaken. i believe there are two other members who were here who will be returning after votes for

final questioning, so you are -- the committee is adjourned until to be reconvened immediately after votes. the state of indiana holds its primary tomorrow, open primary in which registered voters can decide when they arrive at the polls, whether to vote democratic or republican. 57 republican delegates are at stake. donald trump is campaigning in south bend and we'll have live coverage on c-span2 at 7:00 stern time. and then at 7:30, c-span will be live in indianapolis at a rally for texas senator ted cruz. campaigning at indiana state fair grounds. polls show donald trump leading senator cruz in the state. while congress is on break this week, it's american history tv in prime time. normally seen weekends here on c-span3. tonight, a look at the worst presidents in american history. and the centennial of the national park service.

here's a preview. >> this whole panel could be rendered moot by the next election. so maybe it would have been bettor have this in 2017. but, as people saw my name on this, the question was, so who's your choice? and i should say i really didn't address the question that way. i mean we can get to that, i probably can throw out some candidates, but what i want to talk about is what do we mean by worst? what do we mean by a bad president? because i think when we think of great presidents, the criteria are pretty clear, and you know we might quibble a little bit but there's a very small number that probably all of us would put there at the very top. but you know you might call it the anna core renin na, bad

presidents are bad in many different ways. and so i want to go through a few of the different kinds of bad president and see which of these really makes for the worst. there are -- first of all, the completely insignificant and forgettable presidents. and as historian really of the 20th century, i, you know, like everyone else, have trouble with all of those 19th century which had the whiskers, which had the burnsides, which was which? you take someone like millard fillmore could be a candidate for worst. i took the trouble, this was a research intensive pan toll bow to white house.gov and this is what they said about millard fillmore there. millard fillmore demonstrated that, through methodical industry and some competence --

some, not a lot, some -- through methodical industry and some competence, an uninspiring man could make the american dream come true. this is the whitehouse.gov. it should be building him up, i think. one kind of worst president, i think, ineffectual, the forgettable, the insignificant. >> the panel discussion on the worst presidents in american history. some of tonight's american history tv in prime time starting 8:00 eastern. at 9:35, a look at 100 years of the national park service. american history tv in prime time, normally seen weekends, here on c-span3. >> madam secretary, we proudly give 72 of our delegate votes to the next president of the united states!

♪ >> back now to the house hearing on s.e.c. oversight with testimony from senior s.e.c. officials on proextending investors. this portion of the financial services subcommittee on championship cal markets ran about 20 minutes. >> good afternoon. hope you appreciate your little break. the committee's called back into session. and at this time, recognize the gentleman from pennsylvania for

five minutes. >> thank you, chairman garrett for permitting me to participate in this hearing. this is a really important hear, s.e.c. oversight of the credit rating agencies and the united states congress oversite over the s.e.c. especially as it relates to consumer protection because each of the witnesses in their opening statements indicated one of the foundational principles whether it's whistle-blower section, office of credit rating agencies, and investor protection sort of central to what you do. i've been following a couple of issues that are the subject of the hearing today. first actually slightly separate issue has to do with foreign companies that somehow get listed on the stock exchanges of our nation and end up being fraudulent companies, many chinese companies, we find out nothing but shell entities. a lot of u.s. investors have been hurt significantly. i'm not going ask did members of the panel to address this but

with the chairman's permission i'd like to write to the members, through the chairman's office. i'm concerned either the s.e.c., united states congress, us working together, not doing enough to protect issue. but today i want to follow up on the issues that were raised by the members mr. lynch and mr. sherman. mr. lynch is concerned as am i that we're not doing enough to stamp out con fwlikts of interest. conflicts of interest in the financial services industry. we have a lot of work to do there. mr. butler in response to mr. lynch's questions, you indicated that in terms of compliance with new regulations that are being issued by the sec, you see this more as a -- i think you said a adjoujourney rather than a destination. i hope it's full compliance with all the regulations including stamping out all conflicts of interest. maybe can you explain what you

mean by journey rather than destination. i hope the journey is quick and that we're not a drift in that journey. what did you mean it's more of a journey than a destination? >> what i meant is compliance isn't an end state with companies that achieve and then compliance is over. i view compliance as something that is something that's needed every single day. the firms have large compliance staffs. they've been adding significantly to the numbers of the compliance staffs. they've been conducting reorganizations internally to effect enhances compliance. what i meant by saying it's a journey not a destination is this is a continually evolving necessity as the industry changes, as the types of products change sh the types of compliance necessary within the firms may need to change. >> certainly you're concerned about conflicts within the credit rating agencies since big three, they account for 80% of the market? >> they're registered through the sec.

certainly you've seen the stories and advertisements about the bland bonds. are you familiar with that? will you give us your understanding of the details? >> i don't have any details. lit to do with the rating agencies, one of which is registered with the sev for sovereigns and one chf is not. i'm looking at an aanalysis done about six months ago, september 2015. seems to have rated as investment great with the bonds of the republic of peru. but you're familiar that are other bonds issued by the government a couple decades ago that were in default. you heard that, correct? >> i've seen the media articles

on it. it's been a while. >> and you're aware they're not willing to rate that debt for some reason. are you aware of that? >> it's been a while since i read the media coverage on it. >> without -- with respect to this particular issue, what are the circumstances that a rating agency should be permitted to rate, you know, lose sovereign debt and get paid to do that? that is part of the business model. we understand. that but ignore the request of the investor community to rate other debt issued by the government that is in default? how is it the rating agencies get to pick and choose what they're going to rate and what they're not going to rate? especially whether it affects small investors in the united states of sneshg. >> the rating agencies are required to establish, maintain and enforce policies and procedures to address the conflicts of interest. and within that, there are conflicts of interests identified which are disclosure based and others that are prohibited. the prohibited conflicts would

include the -- >> but what kind of discretion does a credit rating agency have to just decide on their own what they're going to rate and what they're not going to rate? >> with regard to our oversight, congressman, we look at the work and the work product that's been done. we don't have authority with regard to the substance of ratings or the procedure methodology. >> i'll tell what you my concern s my concern is that there are pension funds in half the states in this country that have invested the requirement savings of police officers, firefighters, building construction trades workers, average every day americans who are losing money in certain investments where standard and poors in this case said, yeah, public of peru is investment grade. but they're in default on other bonds. i'm concerned that they're deciding what bonds will rate and what bonds are not going to rate. if they rated these land bonds or issued a couple decades ago and found they were in default that, would affect the other ratings that they issued. and then they have an effect on

the ratings not just of the republic of peru but other corporate bonds that they rated also within that governmental area. so i would ask you to take a look at that and question the rating agencies for ushgs five, however many there are, not very many, not enough i would say and question them as to how they're using the discretion, what to rate and what not to rate, whether there is a con fwlikt inherent in that decision and how many working class americans are being affected negatively impacted, losing retirement savings as a result. would you do that for me? >> thank you, sir. >> will do you that? >> i'm not at liberty to discuss the substance of the examination. >> i'll follow up with you. >> thank you. >> i call on the gentleman from maine. i just want clarity as to one of the answers on that. when you say that there are rules in place as far as the conflict of interest or the decision by the rating agency, i

think i understand what you're saying. but that con fwlikt that they had is on the -- that conflict that they have to make sure there isn't a conflict of interest is on the going forward, the decision -- on the entity that they're going to be rating tomorrow. so if they're rating the xyz entry or entity over here, they have to make sure there is no conflict in that decision, right? that's what you're saying? >> the new rules that were adopted august 2014 effective june 2015 require -- there is a certificate with the rating action. it could be either a new issuance or surveillance of an old rating. >> right. >> but it doesn't go to the point of the gentleman of pennsylvania was making as far as their decision not to rate someone? there's no question -- you don't look to see whether there was a conflict of interest whether they decided we're not going to rate xy and z, is that correct? >> as currently crafted to day, we're looking for surveillance

activities. >> okay. >> thank you. >> with that, not last but not least, the gentleman from maine is recognized for five minutes or so. >> thank you, mr. chairman. appreciate it very much. mr. wyatt, you represent or you are the director of the office of compliance and examinations for the sec, correct, sir? >> that is correct. and the sec has about 4,000 employees and a budge of 1 plt $6 billion last time i looked. >> sec wide. >> yes, exactly. >> and of those 4,000 employees, 1,000 work for you? >> 1,011, yes. >> i represent maine's second district. this is more than down east maine. it is the most wonderful part of the world if you ever vacation. i know you're going to want to take the other associates with you to go vacation there this sum cher is upon us. we have a little snow but it's melting. now we -- we're a district of small business owners.

we're a district of small savers. hard-working people, honest people, people putting aside, auto, $100 a month to save for college. the kid's college education, maybe for their retirement. now your job at the sec and all your jobs is to make sure that there's integrity with respect to our publicly traded and other securities to make sure our investors have a fair shake and n. doing what they're investing in. help me out. the budget goes up. you always come back to us every year for more money. i think you ask for another 10% or 15% from last year to this year. so my question is, with 1,000 folks and your staff, how many inspections -- how many examinations per inspector do you folks conduct for our registered investment advisors?

the folks that manage our pension funds and our 401-k funds and iras, how many inspections, examinations per inspector per year? >> the average is six to eight for examiners. i highlight we do not conduct examination onz an individual basis. they examine investment advisors in teams. >> okay. 6 to 8. okay. but you ask for an increase in your budget every year. what was the number -- how many examinations did your teams conduct year before? >> last year we conducted 1,992. >> no, how many per inspector? >> per inspector? it was -- we've had 23% increase in the number of exams per examiner in the past three years. >> okay. thank you, i appreciate that very much. let's continue to drill down on the examinations, sir. i know that the administration's financial regulations ask you to make sure that you conduct

robust examinations of the vi r investment advisory space. there are 14,000 registered advisors in america? >> roughly. >> okay. do you think that you folks have spent a disproportionate amount of time recently on the private equity space? in other words, the type of investment adviser that deals with more a credited investor, larger investors, more sophisticated investors as compared to folks who don't make a living investing? they might be nurseors teas or s or the folks in our district. do you spend a disproportionate amount of time on the private equity examinations for large investors as compared to the investment adviser space for smaller investors? >> i suggest the large investors are the endowment institutional investors. the pension funds are investing on behalf of the firefighters.

i say with regards to our examinations of private funds, we've been very efficient in the resources we dedicated to them when they came into registration with the sec as a result of dodd-frank. we had limited examinations of private funds. those funds uncovered some activities regarding fees and expenses and allocation of trades. that resulted in funds being returned to those institutional investors who again are investing on behalf of the firefighters, policemen, and teachers. >> i think you would -- i appreciate. that you want to make sure that your scope of examination stands all on that. i understand that. mr. wyatt, wouldn't you agree that it's incumbent upon us to make sure we look out for the small saver, the small investor and whereas those that are make a living in that business they usually are br abbetter able. we must increase the exam

coverage. i would say that private fund, many of those have come to oc and asked for our assistance in how they can improve their due diligence. we got access to information that they otherwise wouldn't get in the course of their due diligence. we're sharing the information so th can be more informed when they make investm next ts and we're doing our most to expand the coverage ratio within the adviser space to get to 10% a year. toughly 30% under management. we hit a four year high with the regards to the number of examinations we've done. we had a net increase of advisors of roughly 1,000. so we're continuing to increase our numbers. we certainly want to dedicate resources to improve our efficiencies. we certainly want to make sure we're doing our most to protect investors. >> mr. chair, if i may justin with one line of questioning, please. i am the last here. yes, sir, i do. thank you very much. thank you, mr. chairman. thank you. mr. wyatt, what would be a great help to me and my office in

representing our second district of maine and also i'm sure to our community and the rest of the country when you're dealing with such an important part of our capital markets, you must have in your department a written set of procedures such that we -- that are responsible for oversight for your entity can make sure that we know exactly how you conduct business, exactly how you make your decision on what inspectors go where and what the expectation is for the number of examinations. just to make sure when you folks come back us to now and ask for more money, we know the taxpayers are getting the right bang four the buck. would you be able to provide those procedural guidelines for us? >> we -- >> do you have written guidelines? >> we have guidelines that are private. >> that's for the examinations. i'm talking for congress that represents the people. do you have a set of procedures that articulate exactly how

couns conduct your examinations? >> that's how we conduct our examinations, yes. >> can you add an addendum to that so we know what kind of activity the amount of activity for the money that we're spending on behalf of the organization that the taxpayers know they're getting their money's worth? >> we can work with your office and provide you with the information you're seeking. >> that will be great. we'll be in touch with you -- what's today? thursday? we'll be in touch with you tomorrow. >> thank you. >> thank you mr. chair very much. >> thank you. since there is no one else here, i can go on for hours here but i won't. vice chair and others, two quick questions as to drill back down a little bit. i think the vice chairman raised this question as far as taking a look back at doing a look back at past rules and how that's all supposed to work and what have you? it's been 30 seconds. what is your game plan? what is your goal? what have you to look backwards towards the last half a dozen years of rules that have been

promulgated over the last half dozen years and to see whether they're working and what have you? >> one of the biggest ones -- one of the biggest sources of rules has come out of the dodd-frank act. i know that the congress is concerned about the cumulative effect of the dodd-frank rules and regulation onz liquidity and financial markets. so they've been charged with doing a study on that very thing. i think it's a terrific suddy to be doing. we've started. we haven't gotten deeply into it. but the question of how liquid are our financial markets, particularly the debt markets, i think is very important policy implications, both here and around the world. and so we're looking forward to doing that. and the impact of these cumulative regulations on that liquidity is going to be an important conclusion and assessment is going to be important conclusion of our study. >> okay. and, of course, that always begs the question as to when? >> you told clus is that we'll

get back to you within a year of the omnibus act last year being passed. i think that's our first draft and 18 months is the final draft. >> and that will look into also besides the two points, look into the -- i'll say it, the cost, economic impact on the industry and the marketplace? >> on the liquidity as i understand it is what you're primarily interested in. >> well, yeah. that i get. and a look at the liquidity and also look at the overall -- the overall cost. what is the economic cost measured in dollars and cents to the industry per se? it's costing us this firm x millions of dollars to do it and this firm x millions of dollars. that may or may not impact li liquidi liquidity, i presume. it costs $10 million to do so but liquidity stays the same. are you also looking at, to the -- you know, nominal cost i guess is the word.

>> i think nominal cost is the word. that will certainly be a part of that study or any economic analysis is to set a baseline. the baseline would include considerations of the cost of operating today, absolutely. >> yeah. and i'll end here. you began with when i first very questions, there are good things as far as what you're talking about here from industry and otherwise, as far as one of your opening comments and they were talking about how some of this information is being put out as far as your studies and what have you represented. i'll put it this way, is that as far as you can go or can you improve that? can you reveal, i don't know if the right word is here? can you reveal more information as far as the methodology, the data points and everything else that goes into it? i ask that question because some folks look here and say, good. but they look at other agencies and how they do their analysis that you do in their area and they put out a fuller, more complete, more indepth

background, if you will, on to that? do you see a comparison? let me ask you that question. do you have a comparison to others ones? do you think can you do more in these areas? >> yes. >> that's my last question you to. >> one thing i'm working on over the past year and a half since i got there is the idea that we bring in all this registrar information. it's treated as confidencetial and private. but that shouldn't interfere with our ability to provide information about various aggregated forms of that information f we're going to be useful, we have to tell people how we made the decision about the aggregation. i agree with you entirely. >> so you're going to be working on that? >> yes. yes. >> with that -- that's good. so with that all being said, i thank the members of the panel and all the witnesses here today. the chair notes that some members may have additional questions for the panel which we'll be submitting in writing. the record will remain open for

five legislative days to submit the questions to you for the witnesses and to have that response placed on the record. and also without objection, members will have five legislative days to submit extraneous materials for the chair for inclusion in the record and i would be remiss if i didn't add this, that if you can't make the trip all the way up to maine, the snow is already gone in new jersey. and things are blooming already in new jersey. it will be another six months before the snow and ice melts in maine w that, this hearing is adjourned.

state of indiana holds its primary tomorrow. they can decide when they arrive at the polls whether to vote democratic or republican. 57 rendell gats apublican deleg stake. we'll have live coverage on c-span2 at 7:00 eastern time. then at 7:30, c-span will be live in indianapolis at a rally for texas senator ted cruz campaigning at the indiana state fair grounds. recent polls show donald trump leading senator cruz in the

state. >> madam secretary, we proudly give 72 of our delegate votes to the next president of the united states. while congress is on break this week, it's american history in prime time, normally seen on weekends here on c-span3. tonight a look at the worst president in american history and the centennial of the national park service.

here's a preview. this whole panel could be rendered mute by the next electi election. so maybe it would be better to have this in 2017. but as people saw this, they said who is your choice? i should say, i really didn't address the question that way. i mean, we can get to that. i probably can throw out some candidates. but what i want to talk about is what do we mean by worst? i think when we think of great presidents, the criteria are pretty clear. we might quibble a little bit, but a small number that all of us would put there at the very top. you might call it bad presidents are bad in many different ways. and i want to go through a few kinds of bad presidents and see

which of these really makes for the worst. there are first of all the insignificant and forgettable presidents. as a historian of the 20th century, i'm like everyone else have trouble with all those 19th century which had the whiskers and the burn sides and which was which? you take someone like milliard fillmore and this was a research-intensive panel to go to white house.gov. this is what they said about him. milliard fillmore demonstrated

that through methodical industry and some competence, some. not a lot, some. fillmore demonstrated that through industry and some competence, an uninspiring man could make the american dream come true. this is on white house.gov. this should be building him up. one kind of worst president is the forgettable or insignificant. the panel discussion on the worst president in american history. just some of tonight's american history tv in prime time starting at 8:00 eastern. then at 9:35, a look at 100 years of the national park service. american history tv in prime time, normally seen weekends here on c-span3. >> tonight on "the communicators," tim winter on their recent report on the 20 years of the tv content ratings

system accord together report the system intended to protect children from violence, sex and profanity on tv has failed. he's join by david shepardson, reporter for thompson roiter. >> there is actually no show on broadcast television, no series on broadcast television today that is rated appropriate for anything older than children. tv 14 is the oldest rating. even most explicit content on prime time broadcast tv is rated as appropriate for children to watch. we learned that the tv networks themselves rate the shows and we learned that the tv advertisers who pat bills for the networks rely on the ratings just like parents do. and so there is a conflict of interest in terms of rating content accurately, allow the advertisers won't sponsor mature audience only content, therefore, the tv networks don't rate anything as appropriate for mature audiences. and the system is incapable of doing as it was intended. >> watch the communicators tonight at 8:00 eastern on

c-span2. >> next, a discussion of the economic consequences of the criminal justice system with officials from the obama administrati administration journalists and economies. it ran an hour and 45 minutes. >> all right. good morning, welcome to the white house. i'm stephanie young. i work in the office of public engagement. we're excited to you have here for this very important discussion. a couple house keeping items. for those of you looking to use wi-fi it is white house 2015 and two exclamation marks.

and as you are participating on social media use our #criminal justice reform. with that i'll turn it over to the senior adviser to the president, valerie jarrett. [ applause ] >> thank you, stephanie and good morning, everyone. welcome to the white house. we are delighted to have you here for what we believe will be a historic week focusing on re-entry around our country. i want to begin by recognizing our partners here today, the brennan center for justice as well as the american enterprise institute. good examples of how broad the political spectrum is focusing on this issue from the progressive to the conservative, all around the country people understand the need generally for criminal justice reform and specifically to make sure that the 600,000 people each year who return back to our communities can do so in a way that will allow them to become members of society, law-abiding members of society and eliminate the

enormous recidivism rate we're seeing around the country. the president this week in his weekly address said it best, he said we know that simply locking people up doesn't make communities safer. it doesn't deal with the conditions that led people to go into criminal activity in the first place. and obviously, we know that is the case. and to the private sector folks who were here today, you realize the impact that our current criminal justice system is having on our economy and we'll be able to drill down into those numbers a bit in the course of our conversation. throughout the week, the

administration is sponsoring activities all across the country. the department of justice through the bureau of prisons and the u.s. attorneys is going to have 550 events all throughout the country focusing on what we could do to help people and to raise awareness on the ground from a whole range of stakeholders so that when they are released, they have the skills they need and they are able to get a job and again be law-abiding members of our society. you'll -- we have announcements that coming from the department of housing and urban development and the department of health and hume ab services, and the department of veteran affairs, the department of -- right here in the white house, for as you will hear from jason furman from the council on economic

advisers. all of the agencies are focusing on what we could do on this important issue of re-entry. recentry fits into the broader picture of criminal justice reform and last summer the president gave a speech where he focused on three buckets. the community, the courthouse and the cell block. so we have a collective responsibility and many of the advocates that are here together together with the private sector have been focusing on improving our communities and everything from early childhood education to breaking the school to prison pipeline to breaking the sexual assault to prison pipeline to ensuring that every child gets that fair shot. the president's my brother's keeper initiative is another way of helping other boys and men of color to get that shot and follow a life free from crime. so we have to improve our community. we also have to improve the courtroom. and you are seeing there is bipartisan support right now for federal legislation that would reduce the mandatory minimums for nonviolent drug offenders that would reinvest back into the system so while people are incarcerated, they have everything from job training to counseling to substance abuse counseling, whatever they need to be able to return to society. we know that right now over half of the folks who are incarcerated have some sort of mental illness. so the best objective of course is to treat them early as soon as it is diagnosed but certainly while their incarcerated, part of our responsibility is to help them again so that they have whatever they need to be able to re-enter society.

we're also focusing on what happens in the cell block. that is the reinvestment. that is ensuring that job opportunities are available. a couple of weeks ago here at the white house we announced our fair pledge business pledge that really generated enormous support from the business community. several months ago when we went around to business leaders and said we know that you're hiring people who have been incarcerated, would you willing to come forward and talk about it and we were met with a deafening silence. and many companies did it -- they simply didn't want to talk about it. but over the course of the last few months we've made progress when we launched this fair pledge. we had nine companies. and big name companies who agreed to come forward and everyone from pepsi cola to coca-cola to koch industries to facebook, et cetera. and now we are up to 90 countries and we're asking people who are interested and people who employ folks across

our country and recognizing that they are better off if they have a job as opposed to not having a job, that will make our community safer and it will certainly improve our economy to go on the white house website under fair chance hiring and sign up for this pledge. it sends a very important message about who we are as a people. part of what is also extraordinary is a broad base of support from faith leaders to the business community, to advocates to think tanks from all political spectrums, recognizing that if we reform our criminal justice system, our communities will be safer and our economy will be stronger. we have -- we spent $80 billion a year -- $80 billion a year on criminal justice -- on mass incarceration. we have 5% of the world's population, yet 25% of the world's prisoners. which is a stark statistic for me was to know that since 1985, the number of women who are incarcerated has gone up by 400%.

and as you hear from jason later, for children who have a father who is incarcerated, there is a 40% greater chance they are in pofrsy. and so the statistics are clear and what we need now is to continue to build on the momentumment and at the federal and the state level as well. occupational licenses are regulated at state level and there are many states that just have blanket prohibitions against anyone incarcerated for a felony to get a license. 40% of our jobs require some sort of a license. and again, it is great work that jason did earlier in the year demonstrating the fact if we were to change those state requirements and tailer the occupational license actually appropriately by reviewing it, then we will be able to imply --

employ so many more people. so a good example is people who are incarcerated are often taught how to be barbers. you need a license to be a barber. so asking our states to take a hard look at how we are licensing is another important step. along the same lines today, the attorney general loretta lynch will be visiting a prison in philadelphia and sending a letter to our nation's governors asking them to provide state i.d. to people when they are released immediately. that is a first step toward being able to get a job. so there is so much we can do if we work together and i guess i just want to close by saying that i do feel we are at a unique moment right now. the nation is focusing on this issue in a way that it hasn't really before. with the number of people who -- 2.2 million people who are incarcerated and the 70 million who have interacted with the criminal justice system, it touches every community in america. and it used to be a topic that we just try to brush under the carpet and ignore and from the

data we've seen and from the human toll that we've observed, that is unsustainable. and so with your help, we actually believe we can make great change. so far that i thank you and would you like for you to welcome arthur brooks who are is the president of aei who will come up and give a few remarks. thank you very much, everybody. [ applause ] >> thank so much, valerie. what an honor it is for me and my colleagues from aei to be here and participate in this event. thank you to the white house for hosting and the brennan center for being involve the with this as well. aei is a think tank in washington and my colleague are dedicated to human dignity and human potential. and there are relatively few subjects that scream out more than what is on hand here today. there are going to be a lot of facts you're hearing from the panel. i'll ask you to consider three. the first is that only a third of america's incarcerated have

any access to vocational or educational programs while in prison. thus leaving them entirely ub prepared for life after prison. the fact is that about half of the incarcerated are functionally ill litter sat. the third follows from the first two facts is that 60% to 70% of all parolies end up back in prison within the first three years after being released. now as jason furman and doug holtz-eakin spointed out and will talk about here today, our society pays an enormous material price for this. it creates an enormous amount of economic inefficiency. now as much as it pains me as an economist to admit it, however, this really isn't about the

money. this is about the lives that we're throwing away. i want to take a few minutes here at the outset to remind myself and all of us that the economic case for reform is really just a proxy for something that is much deeper that we're talking about here today. my colleagues and i at aei are working with the best nonprofits in the country that have a visionary notion of how to use human lives, how to integrate our society better along all different strata of where people are, whether they are in cars rated or free or educated or not. and we've been working lately with a group in new york city called the dough fund. some of you may have heard it. it specializes in men who have all of the strikes against them. they are homeless, they've been incarcerated mostly, they've been addicted to substances in the main and abandoned their families, they are not working. what does it do with these guys? it helps them put their lives back together by helping them to understand that our society needs them and needs their work. this is a subversive and radical concept. the first time i met men from

this organization, i was in new york city and i met a man by the name of richard who had been in prison for 22 years since he was 18 years old. and he was working for the first time. about a year after being released, hes would working for a -- he was working for a low wage, a job that some people here in washington, d.c. might call a dead end job. he wouldn't have considered it such. he was working for an exterminator agency and i asked how his life was going and he demonstrated by showing me an iphone on -- and the first one he ever owned an that is not the secret of happiness but it is pretty cool. and he said read this e-mail from my boss. it says, emergency bed bug job, east 65th street, i need you now. i said, so? he said, read it again. it says i need you now. nobody in my life has ever said those words to me before. when we hear today about the

economic cost of mass incarceration, remember that that is a proxy for not needing people. what do we need to do? not throw away money? no, we need to not throw away people. that is what we're all about. what can we do to need the people who commit crimes and are from prison. that is the answer we're dedicated to in the next year as we work on inmate education and re-entry programs. that is a question that i hope we'll begin to answer today. and by the way, one more thing. before i close. i think that we're looking -- i think many of us are looking for a way to bring ideological components together, there is a deep problem with polarization that is troubling every person in this room. what better way than to bring people together than to look at those at the periphery of our society and say what can we do together to need them. this today could be the beginning of needing every citizen in our society, including those who have been in

principle and to bring ourselves together as a result of it, no matter where we sit on the political spectrum. thank you for the opportunity to change this debate in this country and for your hard work and interest in this topic and it is an honor to be part of this effort. [ applause ] thank you so much. i'm michael waldman. i'm the president of the brennan center for justice at nyu school of law. we are thrilled to be part of this event, to be co-hosting with the american enterprise institute and to be here with all of you in the white house. to learn from and understand this significant new report and this significant new dialogue about the economic costs of this very human problem.

first of all, i want to thank and acknowledge arthur brooks for his remarks and for the creativity that he brings to public policy. those of us who read his dialogues in the new york times and elsewhere are glad to be doing this together. and want to thank valerie jarrett for her powerful voice and passion that she has brought to this issue and that the entire administration has brought to this vexing issue. something that, in a moment of polarization and division and disfunction, has united communities from across the political spectrum and we're very grateful again to be part of this -- this discrete aspect of it. we want to thank and acknowledge jason furman and the council ever economic advisers who have done path-breaking work on this. and i want to thank my colleagues at the brennan center for justice, including several

board members, tom jordy and emily spitzer and the members of our economic advisery board, some of whom you'll be hearing from shortly. as we all know and as you've heard, this is a singular moment in one of the most challenging issues facing our country and that has faced our country for years. this is a topic, of course, that has been at the center of american history, at the center of our concerns but in so many ways the magnitude of the problem has been hiding in plain sight. this is one of those issues where the aggregate statistics in some ways can have a punch in the gut impact greater than anything else. the fact that we have 5% of the world's population and 25% of the world's prison population is not only wrong, it is shocking. we all know there are costs to that phenomenon -- social, moral, racial and economic. we know as well that we're

having this conversation at a time when crime is down dramatically over where it had been. a fact that creates the opening for us to have a reason and creative assessment of what we ought to do. and we know that the level of incarceration and over-criminalization is simply not necessary to keep our streets safe and keep our communities safe. one of the studies that the brennan center for justice did last year assessed the impact of mass incarceration on public safety and found that it had very little to no impact on keeping our streets safe at this moment in time. it's also a singular moment because of the remarkable coming together across communities, across ideological perspectives

across partisan perspectives around this issue. we'll hear from business leaders, from some of the top economic thinkers and a conversation like this could be replicated in rooms across the country. i can't think of any other issue on which i've ever worked where there is this much of a genuine seeking of common ground. it is not merely that there are two sides and they each give up something and they find themselves perhaps to their own astonishment in the same place. but people are coming to this with similar views and similar goals. each because of their own core aspirations. it is striking to me that aei, which is renowned as a pre-enterprise-oriented institution and think-tank, has placed at the center of its thinking about this, the very human -- the human stories and

the human narratives. and i was struck also by the concept of human dignity. the bennan center for justice is 20 years old. it was started by the clerks and family of the late supreme court justice william brennan, we're affiliated with nyu school of law. and while we don't take our work from the specifics of his opinions, we take our values from his notion that at the heart of the law was, as he put it, the concept of human dignity. and we have found in working on this issue of mass incarceration that the rigor and the impact of economic analysis is matchless. three years ago, we focused our criminal justice work under the leadership of my colleague machete, who you are hearing from on mass incarceration and understanding that bringing the tools of economics and of the economics profession was something we could help with. and we believe that there are

measurable costs and benefits. we believe that there are tremendous and often unexamined social negative consequences from the current system and we believe that the very financial incentives built into budgeting and the entire governmental system that steered us off toward where we are now could help steer us with better foresight away toward a wiser policy. we have launched -- and this is actually the first public event to -- to utilize their generous services. we've launched an economic advisory board of the country's top economists, including folks you're hearing from today. larry somers, professor joseph stig let, dean laura tyson and glenn lori and a whole bunch of others from a whole array of perspectives helping us to understand and kick the tires on our work to make sure that it meets the top rigorous standards as we meld economic analysis with core legal analysis. because of that focus, we're thrilled to be able to be part of this event.

this report you're about to hear about is really a landmark. it is rock solid. it brings together the top minds at the cea around something that is as important as m 1 and m 2 or anything else they might be focusing on. and i am delighted to introduce to you, to talk about the new report, dr. jason furman. as you know, he is the chair of the council of economic advisers, one of the leading public economists in the country. before this, i should know, he, among other things, headed the hamilton project, proving he was precious beyond words in understanding how cool alexander hamilton could be to a wide audience. so dr. jason furman. [ applause ] >> thank you. thank you for that introduction, michael. president truman was reported to have been frustrated with his economic team because every time

he asked them for advice on something, rather than telling him something clear and direct, they would tell him, well on the one hand, and then they would say on the other hand and he wanted to get himself a one-handed economic adviser. the topic we're discussing today is one that really lends itself to a one-handed economic adviser. because as our team, led by cea member sandy black and engineera palma emily wiseberg and gabe scheffler put together this report, the research on this is

really clear, it is really consistent. it goes across party lines as we heard a little bit in the opening and as we'll hear on the panel. and the changes that we've seen in policy over the last decades that led to the mass incarceration that led to the -- the increasing difficulty of reincorporating people in the workforce wasn't because of some set of studies or research or analysis done by economist or lawyers or criminologists, it was for other reasons. and using that evidence, that research, can help us point in a better direction. now we don't have all of the answers on this topic, like many other topics. but we do have a lot of them. and the issue is to put them in place at the federal level and also encouraging a conversation at the state and local level. we put out a 79-page report. i'll take you through some of the highlights of it very

quickly. and my goal in doing this is not only to summarize the report, but to take what was a really morally and uplifting set of comments by arthur brooks and prove that economists really are not for the most part morally uplifting and elevating. but can show you lots of numbers. so begin with the fact that we've heard many times before, the incarceration rate grew more than 220% between 1980 and 2014. it grew at the federal, state and local level. total spending on incarceration is over $80 billion a year. and in fact, there are 11 states that spent more on corrections than on higher education. if you look at us in comparison to other countries, the united states is second -- if the next chart, the united states is second in the world in incarceration rate. second to the seychelles.

so every country has a lower on average one fourth what the incarceration rate is in the united states. this big increase in the incarceration has happened, as you could see in the next slide, despite a substantial decline in the crime rates, with the violent crime rate falling 39% and the property crime rate falling 52%. one of the exercises we go through in the report is we say, what if criminal justice policies had remained the same-sex. they hadn't changed. and you just saw this evolution in crime rates, what would have happened to the incarceration rate? the answer at the state level is the incarceration rate would have fallen by 7%. instead is rose by 125%. and at the federal level, the

incarceration rate rose much faster given the decline in crime. so the question is what happened? just an immediate in accounting for the incarceration, not delving into the actual causes but the pure accounting exercise, it is not that there is more crimes, it's that there is greater severity of sentencing, and increased enforcement. between 1984 and 2004, nearly all crimes experienced a substantial increase in time served. and time served for drug offenses in federal prisons more than doubled over the last two decades. at the same time, arrests have come down with the decline in crime. but very couldn't come down as much. the arrest rate has risen. and that has also contributed to this increase in incarceration. and once again, drugs has played a big role, with drug arrest rates increasing by over 90% over this period. the question then is what caused

this decline in crime. and there is a lot of debate among economists exactly what it was. the one thing that pretty much all of the evidence agrees on is what it wasn't and that was the increase in incarceration. first of all, the evidence is that, like so much in economics, there is declining benefits to additional incarceration. you're getting increasingly less violent, less dangerous people as you expand incarceration so that has less of an impact on crime and you are keeping people in prison for longer after the point -- the ages where they are more likely to commit further crimes. when you look at studies, they find that longer sentence lengths, which is a big cause of the increase in incarceration, play -- has little deterrent effect on offenders. one recent paper found that a 10% increase in sentence length corresponds to somewhere between

a zero and 0.5% decrease in juvenile arrest rates. in fact, incarceration can have the opposite effect, which is that longer spells of incarceration, and in this case the study finds each additional year of incarceration can lead to an average increase in future offending of 4% to 7 percentage points. as i said, there isn't a single agreed upon cause in the reduction in crime but demographic changes and improving economic conditions an changes in policing tactics are three of the theories that people have. the impact of mass incarceration is not spread evenly across the population.

although blacks and hispanics represent approximately 30% of the population, they comprise over 50% of the incarcerated population. the incarcerate for blacks dwarfed the rate of other groups, 3.5 times larger than that for whites. and a large body of researchers tried to look carefully at the causal role that race plays in this and finds that for similar offenses, blacks and hispanics are more likely to be stopped and searched, arrested, convicted and sentenced to harsh erpenalities. for example, even controlling for arrest defendant characteristics, prosecutors are 75% por likely to charge black defendants with offenses that carry mandatory minimums. interactions with the criminal justice system are dallas disproportionately concentrated between poor individuals and

those with high rates of mental illness and substance abuse. this all has substantial consequences that arthur and valerie both spoke to in their comments. one piece of evidence is just the interview call-back rate for people with criminal records is lower than without criminal records and it is much lower for blacks with criminal records than it is for whites with criminal records. criminal sanctions can also have negative consequences for a range of factors like health, debt, transportation, housing and food security. and the statistic that valerie was so struck by, the probability of the family in poverty increases by nearly 40% while a father is incarcerated. the fact that tens of millions of americans have a record means

this is applying to a larger and larger fraction of our population over time. and playing a role in a range of the economic challenges we face, including the long-term decline in the labor force participation rate. it is important to understand, it is not just the criminal justice system that has costs. crime also has a very substantial cost. it produces direct damages to property and medical costs. pain, suffering, fear, reduced quality and loss of life and it affects some of our poorest communities disproportionately. economists trying to estimate the social cost of crime have a range of estimates, but a reasonable estimate of the mean or median is about $300 billion a year. this is something that is serious and important. the question, though, is what

are we going to do to reduce this? what is the most cost-effective, the most absolutely effective way to do it. and a range of tuddies that we surveyed and we tried to look at high-quality studies, most of these peer reviewed in economics and other journals, find that a minority of studies have found that great erin -- great incarceration passed a cost benefit test. and some of the studies, how much does it cost to put someone in jail, does that reduce the likelihood of crime or keeping them in principle and in some cases the studies go further and factor in the collateral damage, the increase in poverty for their family and the impact that has on society from crime.

and contrast measures that strengthen our community like education have uniformly found to pass a cost-benefit test. an important part of the strategy to reduce crime is strengthening our economy and raising wages. and we may not -- everyone on the panel agree on the strategy to raise wages. but put one up that this administration supports and just uses it -- use it to contrast to incarceration. based on estimates in the literature if you increase spending on incarceration, by 10% to a $12 million that would reduce the crime rate by 1% to 4% and if you take into account the cost versus the benefits, the net societal benefit would be between minus 8 billion and plus 1 billion and that is a generous estimate because it doesn't factor in all of the collateral consequences of that incarceration. so incarceration is likely to both have a smaller effect on

crime and a larger net societal cost than what's shown here. contrast that to raising the minimum wage to $12 an hour in 2020, for the sake of this example assumes no employment effects, that would have an even larger impact on crime than that incarceration change. would have a net societal benefit just from the crime reduction and that would be true even if you include employment elasticities from the range of the economic literature. i want to conclude by talks about the administration's approach to dealing with criminal justice reform. as valley outlined, it's a holistic approach that's first of all spoked on the community, strengthening the economy, raising wages, investing in early childhood education, community policing and policing transparency. ban the box. licensing exclusions. that's something valerie

highlighted. there are right now 46,000 federal, state, and local laws regarding the ability of ex-offenders to work in certain -- start certain businesses, work in certain jobs or be in certain occupations. 46,000. many of those give no regard whatsoever to when the crime was committed, what the nature of the crime was or the relevance of it for the particular occupation. that's something that we've been working together with cook industries, among others, to encourage states to take a look at in this area and more broadly. the secondary is the courtroom and there's bipartisan support in both the house and the senate for sentencing reform. steps -- building on steps we've already taken in some drug sentencing. an issue earlier this year

highlighted the very regressive nature of fines, fees, and bail which can be much larger for low income households can often be inefficient and not even collected and can have very large economic consequences without -- with very different deterrent effects for a high-income person that wouldn't notice it as compared to the low-income person where it would represent a substantial fraction of their income. and that's something doj has been encouraging states and localities to take a look at. finally, the cell block, including education, rehabilitation, job training, a set of measures being rolled out across the country this week as part of re-entry week and steps that the president and the attorney general announced a few months ago to address solitary confinement, including the solitary confinement of minors.

so we're really happy, you're all having a chance to be here today to discuss what we think is a really important issue. it's an issue that has a lot of important dimensions, moral, legal, political. we hope to convince you that the economic and business one is one of those important dimensions as well. thank you. [ applause ] >> we'll hear from our panel next. our panel led by david rednie from "the economist" who will introduce everyone else.

>> thank you very much for being here today. thank you for letting "the economist" moderate this panel. all panels in washington are always immensely distinguished, but this one really is immensely distinguished. i tell you something else, as a professional skeptskeptic, a l swrurnliswrurn swrurnliswrurnl journalist, wondering whether anything can get done in this current political climate. you look at who's behind an initiative. if you were serious on trying to get something done on a bipartisan. this is the kind of panel you get behind, this kind of initiative. even as a professional skeptic, reporter, it is an impressive panel. we have to my left douglas holtz-eakin. also former chief economist for

the -- he's a member of the brennan center's economic advisory board. we have todd cox, director of criminal justice policy at the center for american progress and a former director of the office of communications and legislative affairs at the u.s. equal employment opportunity commission. we have daniel loeb, founder and chef executive officer of third point and speaking very much for the fiphilanthropic community vy much involved in this. we have inimai chattiar. last but not least we have peter orszag. a former director of the white house office of management and budget and the u.s. congressional budget office. he is also a member of the brennan center economic advisory

board. an extraordinary mix of economic, political savvy and bipartisan credentials. i'm going to start by asking one question to each of the panelists then we're going to try and have more of a free-flowing discussion. the first question goes to douglas holtz-eakin. this whole thing we stressed about the cost and benefit analysis of criminal justice system. and this is a topic you've actually written about with chairman furman. why should we be thinking in terms of cost and benefit instead of politics and what's just and what's unjust? what's the benefit of that approach? >> well, let me first do what we have to in washington, thank you, i'll do it quickly. thank you to the white house for this event and council of economic advisers for tremendous support. to the brennen center for sponsoring this event and putting up with me. i'm grateful for all of those. i'm especially thankful that the

advisers put out a report in the cost/benefit framework and for those of you who are not economists and who are afraid when they start coming out with benefit/cost analyses because you think they were born without souls or had them surgically removed, that's not the right way to think about it. i'm an economist because it's a useful way for me to organize my thinking about the world benefit/cost analysis is that organization. there are things which are good and bad. we put the good ones on the benefit side, the bad ones on the cost side and we may or may not be able to put dollars on them. the loss of a productive life for someone who is incarcerated too long is an incalculabe loss at some level. we can bring down things we know and don't know that's really useful in doing disciplined public policy. it tells you a couple things. number one, it tells you sometimes it's a slam dunk. you look at the benefits, the cost, everything's been

identified by the literature. it's pretty simple. we have a problem here and we can fix it. we have the tools to fix it. the second thing is it identifies magnitudes. when are you really out of line? what are big costs to society? and it's great to solve a bunch of little problems. i have devoted my recareer to tt most likely. it's better to solve a big problem. if you've identified a big problem and you have a way to go forward on it, that's important. the nice thing about the report, it does that so clearly. it's a beautifully written report. it doesn't stop there. it also gives us some solutions. i think you couldn't ask for more any a report. >> thank you very much. peter orszag, i mean, you write -- you've written this report talks about failed policy.

i think it's very powerful the way it talks about policy not humanitarian, policy that is not perceived as just by communities, but it also uses what efficiency, staggeringly inefficient policy. you've written a lot recently about the inefficiency of this policy. tell me about the case that this is a bad way to fund policy. and that government can do this different and you have this phrase of success-oriented funding. why to you support that kind of approach? >> well, first of all, let me just note this is one example in a broader phenomenon of needing more evidence with regard to how we go about policymaking. i agree with arthur brooks, that ultimately we're not in to saving dollars. we should be talks about not wasting lives. but in order to get there, we need to make sure what the federal government does makes sense and is backed by evidence. unfortunately, that's a broader phenomenon. the administration is making a significant amount of progress in bringing evidence to bear across a whole array of federal

mollsy policies, but it's still the case of far too little of what we do actually makes sense or is backed by specific evidence that it works. and that definitely applies to criminal justice. i don't think you could -- it's very rare in academic literature to find not like an 80-20 but basically a 100-zero type of situation which is what applies to the way we've gone about trying to deter crime. effectively, what the evidence strongly suggests is that the severity of punishment matters much less than its certainty and we put much too much emphasis on the severity on the length of prison sentences and much too little on providing certainty and there's a whole variety of reasons. that shouldn't be surprising to us. behavioral economics suggests something that happens 15 or 20 years from now affects behavior much less than something that will happen tomorrow. by emphasizing prison